EU Threatens US with Trade Sanctions Over FSC Tax Breaks

The European Union (EU) advised the World Trade Organization (WTO), on Monday, that unless the United States ends all provisions of the Foreign Sales Corporation tax program in 60 days, it will reinstate sanctions against a number of US products. The WTO ruled in February that the American Jobs Creation Act of 2004 did not end the Foreign Sales Corporation (FSC) tax arrangement, considered an illegal government subsidy by WTO rules, because the act allowed a two-year phase-out of the program and grandfathered exporters that had sales contracts dated before September 17, 2003, the New York Times reports.

The EU first imposed sanctions on the U.S. in 2002 when the WTO ruled that the Foreign Sales corporation tax program was a government subsidy, but lifted them when the American Jobs Creation Act was passed in 2004.

European trade officials said that the largest single beneficiary of the transition provisions of the Jobs Creation Act is Boeing, which can claim $615 million in tax breaks over the next ten years, the Times says. The U.S. had argued that this was not a significant amount of money.

U.S. officials said they were pleased that the WTO found that Washington âhas in large part withdrawn the prohibited subsidies,â the Associated Press reports, but did not indicate that the U.S. would implement the WTO recommendations before the 60-day deadline.

Officials also linked the threat of sanctions with the ongoing dispute between the United States and the EU in the WTO over government subsidies for Boeing and Airbus, with both sides claiming that government aid gives the other a market advantage. Airbus, owned by EADS and BAE Systems, has said that it will not take the disputed state support until the WTO resolves the dispute, BBC News reports.

Raising yet another issue in this dispute on Tuesday, the EU asked the WTO to allow countries to obtain information from one another on payments to companies, the Seattle Post-Intelligencer reports. The U.S. is refusing to cooperate because it says the information requests relate to programs that are outside the scope of the WTO's investigation.

The Post-Intelligencer reports that the âconstant maneuvering by both governmentsâ and the difficult nature of the issue have led to the formal suspension of the WTO's goal of completing initial investigation of the companies' subsidies by July 2006.